ais hall 7e chap1

Chapter 1The Information System:

An Accountant’s Perspective

Objectives for Chapter 1· Understand the primary information flows within the business

environment.· Understand the difference between accounting information

systems and management information systems.· Understand the difference between Financial transactions and

non-financial transactions.· Know the general model for information systems.· Be familiar with the functional areas of a business.· Understand the stages in the evolution of information systems.· Understand the relationship between the three roles of

accountants in an information system.

Internal & External Information Flows

Internal Information Flows

• Horizontal flows of information used primarily at the operations level to capture transaction and operations data

• Vertical flows of information– downward flows — instructions, quotas, and

budgets– upward flows — aggregated transaction and

operations data

Information Requirements

• Each user group has unique information requirements.

• The higher the level of the organization, the greater the need for more aggregated information and less need for detail.

Information in Business

• Information is a business resource that:–needs to be appropriately managed– is vital to the survival of contemporary

businesses

What is a System?

• A group of interrelated multiple components or subsystems that serve a common purpose

• System or subsystem?– A system is called a subsystem when it is viewed

as a component of a larger system.– A subsystem is considered a system when it is the

focus of attention.

System Decomposition versus System Interdependency

• System Decomposition – the process of dividing the system into smaller

subsystem parts• System Interdependency – distinct parts are not self-contained – they are reliant upon the functioning of the other

parts of the system – all distinct parts must be functioning or the system

will fail

What is an Information System?

• An information system is the set of formal procedures by which data are collected, processed into information, and distributed to users.

Transactions

• A transaction is a business event.• Financial transactions – economic events that affect the assets and

equities of the organization – e.g., purchase of an airline ticket

• Nonfinancial transactions– all other events processed by the organization’s

information system – e.g., an airline reservation — no commitment by

the customer

Transactions

Financial

Transactions

Nonfinancial

Transactions

Information System

User Decisions

Information

What is an Accounting Information System?

• Accounting is an information system.– It identifies, collects, processes, and

communicates economic information about a firm using a wide variety of technologies.

– It captures and records the financial effects of the firm’s transactions.

– It distributes transaction information to operations personnel to coordinate many key tasks.

AIS versus MIS

• Accounting Information Systems (AIS) process – financial transactions; e.g., sale of goods – nonfinancial transactions that directly affect the

processing of financial transactions; e.g., addition of newly approved vendors

• Management Information Systems (MIS) process – nonfinancial transactions that are not normally

processed by traditional AIS; e.g., tracking customer complaints

AIS versus MIS?

IS

AIS

GLS/FRS TPS MRS

MIS

FinancialManagement

Systems

MarketingSystems

Distribution Systems

Human Resource Systems

AIS Subsystems

• Transaction processing system (TPS)– supports daily business operations

• General Ledger/ Financial Reporting System (GL/FRS)– produces financial statements and reports

• Management Reporting System (MRS)– produces special-purpose reports for internal use

General Model for AIS

Data Sources

• Data sources are financial transactions that enter the information system from internal and external sources. – External financial transactions are the most

common source of data for most organizations.• E.g., sale of goods and services, purchase of inventory, receipt of

cash, and disbursement of cash (including payroll)

– Internal financial transactions involve the exchange or movement of resources within the organization. • E.g., movement of raw materials into work-in-process (WIP),

application of labor and overhead to WIP, transfer of WIP into finished goods inventory, and depreciation of equipment

Transforming the Data into Information

Functions for transforming data into information according to the general AIS model:

1. Data Collection2. Data Processing3. Data Management4. Information Generation

1. Data Collection

• Capturing transaction data• Recording data onto forms• Validating and editing the data

2. Data Processing

• Classifying• Transcribing• Sorting• Batching• Merging• Calculating• Summarizing• Comparing

3. Data Management

• Storing• Retrieving• Deleting

4. Information Generation

• Compiling• Arranging• Formatting• Presenting

Characteristics of Useful Information

• Regardless of physical form or technology, useful information has the following characteristics: – Relevance: serves a purpose– Timeliness: no older than the time period of the

action it supports– Accuracy: free from material errors– Completeness: all information essential to a

decision or task is present– Summarization: aggregated in accordance with

the user’s needs

Information System Objectives in a Business Context

• The goal of an information system is to support – the stewardship function of management–management decision making– the firm’s day-to-day operations

Organizational Structure

• The structure of an organization helps to allocate – responsibility– authority– accountability

• Segmenting by business function is a very common method of organizing.

Functional Areas• Inventory/Materials Management– purchasing, receiving and stores

• Production– production planning, quality control, and

maintenance• Marketing• Distribution• Personnel• Finance• Accounting• Computer Services

Accounting Independence

• Information reliability requires accounting independence.– Accounting activities must be separate and

independent of the functional areas maintaining resources.

– Accounting supports these functions with information but does not actively participate.

– Decisions makers in these functions require that such vital information be supplied by an independent source to ensure its integrity.

The Computer Services Function

Centralized Data Processing

Distributed DataProcessing Most companies fall in between.

All data processingis performed byone or more largecomputers housedat a central sitethat serves users throughout theorganization.

Primary areas:database administrationdata processingsystems developmentsystems maintenance

Reorganizing thecomputer services function into small information processingunits that are distributedto end users and placed under their control

Organization of IT Function in a Centralized System

Organizational Structure for a DistributedProcessing System

Potential Advantages of DDP

• Cost reductions in hardware and data entry tasks

• Improved cost control responsibility• Improved user satisfaction since control is

closer to the user level• Backup of data can be improved through the

use of multiple data storage sites

Potential Disadvantages of DDP

• Loss of control• Mismanagement of company resources• Hardware and software incompatibility• Redundant tasks and data• Consolidating tasks usually segregated• Difficulty attracting qualified personnel• Lack of standards

Manual Process Model

• Transaction processing, information processing, and accounting are physically performed by people, usually using paper documents.

• Useful to study because:– helps link AIS courses to other accounting courses– often easier to understand business processes

when not shrouded in technology– facilitates understanding internal controls

The Evolution of IS Models: The Flat-File Model

Data Redundancy Problems

• Data Storage - excessive storage costs of paper documents and/or magnetic form

• Data Updating - changes or additions must be performed multiple times

• Currency of Information - potential problem of failing to update all affected files

• Task-Data Dependency - user’s inability to obtain additional information as needs change

• Data Integration - separate files are difficult to integrate across multiple users

The Evolution of IS Models: The Database Model

An REA Data Model Example

34

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REA Model

• The REA model is an accounting framework for modeling an organization’s – economic resources; e.g., assets – economic events; i.e., affect changes in resources– economic agents; i.e., individuals and departments

that participate in an economic event – Interrelationships among resources, events and

agents

• Entity-relationship diagrams (ERD) are often used to model these relationships.

Accountants as Information System Users

• Accountants must be able to clearly convey their needs to the systems professionals who design the system.

• The accountant should actively participate in systems development projects to ensure appropriate systems design.

Accountants as System Designers

• The accounting function is responsible for the conceptual system, while the computer function is responsible for the physical system.

• The conceptual system determines the nature of the information required, its sources, its destination, and the accounting rules that must be applied.

Accountants as System Auditors

• External Auditors– attest to fairness of financial statements– assurance service: broader in scope than traditional

attestation audit• IT Auditors– evaluate IT, often as part of external audit

• Internal Auditors– in-house IS and IT appraisal services